Chris Mayer

“The truth, of course, is that stock prices are at these levels only because the government printed trillions of dollars to bid them up.”

— Paul Singer, Elliott Management Corp.

I was reading through the latest U.S housing data earlier this week. Single-family home sales fell 13.4% in July as compared to June. It was the first month to absorb the full percentage point increase in 30-year mortgage rates since the bottom in May.

May, of course, looks more and more like a giant fault line that shifted. It was in May that the Federal Reserve chief started to talk about “tapering.” This would end the Fed’s buying spree that’s propped up markets and driven interest rates to new lows.

That shift caused a noticeable quake in a number of markets that seem dependent on low rates.

Housing, of course, is a big one. Not only did housing sales fall, but the median price of a U.S. home also fell a smidge — from $258,500 to $257,200. Obviously, higher mortgage rates make housing less affordable.

The most remarkable impact on housing, though, I think comes from taking a look at the homebuilder stocks since their May peaks. The iShares U.S. Home Construction ETF (ITB) — made up of U.S. homebuilder stocks — is down 20%. As the stock market looks forward, this is a damning view of the outlook for U.S. housing.

Yet stocks such as Lowe’s and Home Depot are near 52-week highs. I was at the Lowe’s within walking distance of my house on Saturday. It was as busy as ever.

I still like the idea of owning a house and renting it, but the best time to buy a house for that purpose has passed in most markets. There are still good deals, but you have to work harder to find them.

The tapering mini-quake knocked down emerging markets, too. Turkey’s stock market fell 9% last week. And many emerging markets — such as Brazil — are down 20% or more since May. So far this year, we’ve avoided emerging markets entirely as far as new ideas go. But I think they are starting to look interesting again.

There is also a currency aspect to the May quake. Many of these currencies lost value against the dollar. Since May, for instance, the Brazilian real is down about 15% against the dollar. These things create serious losses for U.S. dollar-based investors.

And this gets to a contrarian idea that you won’t want to hear, but will probably prove right. Every time the Fed ended some previous intervention — QE1 and QE2 and even Operation Twist — the U.S. dollar rallied.

So tapering raises U.S. interest rates, which makes holding U.S. dollars more attractive compared with other currencies than they were before. Hence, the dollar rallies. It seems perverse, but after all that’s happened, people still turn to the dollar when they want a safe place to park assets, if only briefly.

That’s the thing to keep in mind, too. When the Fed announced QE1 and later QE2, the dollar went into a decline that lasted months. So it seems likely that after the taper is over, the Fed will come back into the market again with some new name for an old thing (money printing) and the dollar will resume its decline.

It’s hard to come away from all of this without thinking that the stock market is where it is largely because of the Fed’s actions, as superinvestor Paul Singer notes up top.

No one really knows what the future holds. That sounds trite, but it’s amazing how many people forget that when they make decisions with their money. There is really only one thing you can do.

Here is Peter Bernstein (1919-2009), the longtime investment thinker and author:

“Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches.” [Bold added].

The only thing we can do is manage our risks. We can stick to undervalued stocks. We can focus on strong balance sheets, which, for businesses are a lot like foundations for buildings. They can be the difference between surviving a crisis and succumbing to it. We also aim to align ourselves with owner-operators — people who have a vested interest in survival.

Now, portfolios are like pirate ships. They are made to sail the open seas in search of treasure. You don’t raise a pirate ship and crew and have them waste away in a harbor somewhere. You send them out and realize that you’ll take some damage from time to time, but that you’ll make it up with the treasures you haul in. The key is not to lose the ship.

Sincerely,

Chris Mayer
Original article posted on Daily Resource Hunter

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Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents

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